Feedback: Refer to section 8.1.AACSB: Reflective thinkingBloom's: ComprehensionDifficulty: IntermediateLearning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.Section: 8.1Topic: Net present value104. In words, explain how the crossover rate is computed and why the net present value profile is useful. The crossover rate is the internal rate of return applied to the differences between the cash flows of two mutually exclusive investments. The net present value profile identifies which one of the mutually exclusive projects should be accepted at a stated rate. One project is acceptable at rates above the crossover rate while the opposite project is acceptable at rates lower than the crossover rate. At the crossover rate, you are indifferent to the projects.Feedback: Refer to section 8.4.AACSB: Reflective thinkingBloom's: ComprehensionDifficulty: IntermediateLearning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.Section: 8.4Topic: Net present value profile8-66
Chapter 08 - Net Present Value and Other Investment CriteriaMultiple Choice Questions 105. Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, should it accept either of them? A. Accept both Projects A and BB. Accept Project A but not Project BC. Accept Project B but not Project AD. Both Project A and B are acceptable but you can only select one projectE.Reject both Projects A and BPaybackA= 3 + [($57,000 - $9,000 - $14,800 - $18,900)/$19,600] = 3.73 yearsPaybackB= 3 + [($61,000 - $16,500 - $26,300 - $15,600)/$4,900 = 3.53 yearsThe firm should reject both projects.AACSB: AnalyticBloom's: AnalysisDifficulty: BasicLearning Objective: 08-01 Summarize the payback rule and some of its shortcomings.Section: 8.2Topic: Payback period8-67
Chapter 08 - Net Present Value and Other Investment Criteria 106. You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $26 million, which will be depreciated straight-line to zero over its three-year life. If the plant has projected net income of $2,348,000, $2,680,000, and $1,920,000 over these three years, what is the project's average accounting return (AAR)? AAR = [($2,348,000 + $2,680,000 + $1,920,000)/3] + [($26,000,000 + $0)/2] = 17.82 percentAACSB: AnalyticBloom's: AnalysisDifficulty: BasicLearning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.Section: 8.3Topic: Average accounting return8-68
Chapter 08 - Net Present Value and Other Investment Criteria
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